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Let's Finally Admit It: The Euro Has Never Worked

Let's Finally Admit It: The Euro Has Never Worked
(Daniel Roland/Getty Images-AFP)

By    |   Tuesday, 26 September 2017 08:07 AM

President Macron of France will deliver a very important speech at the Sorbonne university in Paris about his visions for rebuilding Europe.

With the British now out of the way, we can expect that Macron’s plans will be structured around a relatively “integrated” vision for the Euro area, with a eurozone budget, parliament and finance minister, as well as an attempt to increase convergence between member states on tax and social issues.

The rest of Europe, outside the euro, does not seem to be in focus, at least if the leaks of the speech’s content are true.

Fact is that intergovernmentalism is and will remain inherently problematic and intergovernmental decision making tends to degenerate into horse trading, with short-term gains valued above the realization of long-term ambitions.

Now, I don’t want to sound too critical, but in all honesty, we must admit that the euro doesn’t work and that it has never worked. Economists with almost one voice declared back in the 1990s that the euro would not work. Economists were ignored, and bad things happen when economists are ignored…

Now, finally, there is recognition that the euro does not work and President Macron is proposing a “possible” solution. A degree of fiscal confederation is a start. Problem is that in Germany after Sunday’s election, the German Free Democratic Party (FDP) that is a liberal and classical liberal political party, and which is a possible and key coalition partner for the new Merkel coalition has already declared that that a fiscal confederation (integration) is out of the question.

Now, will markets pay attention? Maybe a little bit, but certainly not that much.

Besides all that, an immediate issue is now how the German political establishment reacts in the wake of a difficult election result for Chancellor Merkel.

Meanwhile in Asia, North Korea has said that the United States has declared war.

A spokesperson for President Trump has said that this is not true.

To be fair, there has been no tweet about a declaration of war on the Trump twitter feed, which argues fairly strongly against the declaration having ever been made.

Financial markets have largely ignored the news.

The headlines do distract from the fact that the attempt to repeal the affordable care act, Obamacare, has failed again with three Republicans refusing to back the repeal. That makes the third failure if anybody is keeping score.

War talk and NFL chatter have pushed the failure down the news agenda and that may have still political ramifications as attempts to get tax-reform are being pursued.

For those of you who had enough with the politics there is the relief of some proper economics today.

Fed Chair Yellen will speak on inflation, uncertainty and monetary policy, a subject that is calculated to set hearts racing for the most apathetic to heightened levels of interest.

Federal Reserve Governor Lael Brainard, Chicago Fed President Charles Evans, Atlanta Fed President Raphael Bostic and Cleveland Fed President Loretta Mester are also making public appearances today.

The uncertainty about the Fed’s monetary policy in the near term is about whether the Fed will raise rates in December.

In practical terms, the Fed has met its inflation target and certainly has met its unemployment target, and now the question is whether it wishes to normalize policy in a normal economic world.

Explaining the model with which the Fed analyzes the world is the important point now.

The data flow is a little less interesting today.

There is the consumer confidence opinion poll.

U.S. new home sales may need a little bit more attention. Housing could be a focus area next year and especially housing costs as the construction sector battles with skill shortages that has gotten worse because of the hurricanes’ damage.

Finally, the National Association for Business Economics informed us yesterday it expects 2.4 percent real U.S. economic growth in 2018. Housing starts are expected to average 1.30 million next year, revised down but still the strongest level since 2007. Consumer price inflation is expected to average 2.1 percent during 2018 following a 1.7 percent rise this year.

The chain PCE price index should rise 1.9 percent from the beginning of next year to the end of 2018, slightly lower than expected earlier, but still the strongest gain since 2011. The Fed is expected to continue raising the federal funds rate to 2.13 percent by the end of 2018.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Now, I don’t want to sound too critical, but in all honesty, we must admit that the euro doesn’t work and that it has never worked.
euro, fed, investors, rates
Tuesday, 26 September 2017 08:07 AM
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